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Risk responses are more like the overall approach. We are at the planning stage, and by identifying the audit risks, we form an approach to focus more towards that direction.
Substantive procedure is more like a “step by step” thing.
So for example, a company has done a revaluation on its NCA half way through the year. You have identified a risk that the depreciation for this year may be charged incorrectly. Your audit response should be to perform further testings to ascertain the correct depreciation charges are recorded by appropriate time-apportionment. One of your substantive procedures may be to recalculate the depreciation charges accordingly (may need to elaborate more).
“The goods are usually in transit for two weeks and the company correctly records the goods when received.”
Yes, the company claims they record the goods when received, but as an auditor you’re not going to just listen to this and not highlighting it as a risk! Extensive testing on the inventory cut-off will be needed to confirm this 🙂
Remember the basic principle of auditors towards risk – Maintaining an attitude of professional scepticism
But whether or not, there are tons of other risks in the scenario given, no harm not including this as an audit risk 🙂
Goods-in-transit has a risk of wrong cut-off date applied, resulting in under or overstatement. As the company’s policy is to record only when received, they may record goods that were placed but not received yet. This appeared in recent past year exams 🙂
Hi Ivan, thank you for your reply. So as referred from you, does that mean I have to include 30% of $10 million instead of $4 million (10-6) for the example below?
On 1 October 2013, Penketh also acquired 30% of Ventor’s equity shares. Ventor’s profit after tax for the year ended 31 March 2014 was $10 million and during March 2014 Ventor paid a dividend of $6 million. Penketh uses equity accounting in its consolidated financial statements for its investment in Ventor.
Penketh’s year end is 31 March 2014. Do I need to time-apportion?
